Project Finance Documents
Complex Documentation Involved In Project Finance
Project Finance Documents Overview
Our Project Finance Services provide clients with advantages that aren’t possible with other financings. We are able to raise tremendous amounts of long-term equity and or limited recourse debt, enabling us to fund large projects while at the same time protecting our client’s balance sheet.
The key to shielding project sponsors from recourse liability are well developed Project Finance Documents. To protect our clients we negotiate Project Finance Documents on their behalf to ensure they are well conceived and well written. We use the Project Finance Documents to allocate risk among the participants, thus enabling project sponsors to undertake larger, higher-risk projects than would otherwise be possible.
Project Finance Documents apply strong discipline to the contracting and operations phases of Project Finance. The documents also mandate the participation of several key private sector participants in the deal which enables us to further allocate risk. The Project Finance Documents can also be used to require host country participation which has the effect of limiting a great deal of the political risk typical of projects in emerging markets.
One disadvantage of Project Finance Documents is that they typically require supervision of the project management and operations that are considered intrusive. However, on balance, well-conceived Project Finance Documents are one of the keys to successfully delivering project funding and should be embraced by the project sponsors and project participants alike. Project Finance Documents are summarized below.
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Why Choose Global Trade Funding?
Why choose Global Trade Funding for international project finance lending? We offer unparalleled project finance underwriting expertise. Our Project Finance team, which has several decades of senior project finance underwriting experience at some of the world’s biggest banks, provide our clients with countless advantages every time we fund a project finance loan. Our expertise uniquely positions us to pre-underwrite every Project Finance Request we receive.
Within 24 hours of receiving a request for project financing, we begin pre-underwriting the project and identify challenges to successful financing. We work with the project sponsors to best structure project parameters, minimize and allocate risk, and present the project loan package to our worldwide network of lenders and investors. The result for our clients? Project Finance loans with the best pricing, best terms and least risk in the industry.
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Engineering, Procurement & Construction
The most common construction contract used in project finance projects is the Engineering, Procurement, and Construction Contract, or EPC Contract. An EPC Contract sets forth the obligation of the contractor to build and deliver the project for a specified price, by a specified date, according to the construction documents, including the plans, specifications, shop drawings and other support documents, all of which combined are known as turnkey.
The terms EPC Contract and turnkey contract are synonymous and interchangeable for all purposes. The phrase turnkey is based on the idea that when the owner takes delivery of the facility at the completion of construction, all the owner need do is turn the key and the facility will function as intended. Alternative forms of construction contracts are a project management contract and alliance contract. Basic terms of a common EPC Contract are:
- Description of the project
- Price and payment terms
- Completion date
- Completion guarantee and Liquidated Damages
- Performance guarantee and Liquidated Damages
- Cap under Liquidated Damages
Concession Deeds are project finance documents between theand a public entity who is, in all likelihood the contracting authority. Concession Deeds concede the use of a government asset, such as a plot of land, road or bridge to the for a specified period. Concession Deeds are found in most projects that involve the government, such as infrastructure projects, and are always executed by a national, regional or municipal government. Concession Deeds include contracts for the following:
- Toll-roads or tunnels for which the concession deed grants a right to collect tolls
- Transportation system like commuter rail where fares are paid to a private company
- Utility projects where payments are made by a municipality or by end-users
- Ports and airports where payments are made by airlines or shipping companies
- Other public sector projects such as schools, hospitals or government buildings
Loan Agreements are project finance documents that govern the relationship between the lenders and the. It determines the basis on which the loan can be drawn and repaid, and contains the usual provisions found in a corporate loan agreement.
The Loan Agreement also contains specialty clauses drafted to cover specific requirements of the project and project documents. Basic terms of a Loan Agreement include the following provisions:
- General conditions precedent
- Conditions precedent to each drawdown
- Availability period, during which the borrower is obliged to pay a commitment fee
- Drawdown mechanics
- Defines interest, charged at a margin over base rate
- Repayment terms
- Financial covenants such as key project metrics, ratios, and covenants
- Dividend restrictions
- Illegality clause
In the event the project financing requires a consortium of lenders, an Intercreditor Agreement will likely be required. An Intercreditor Agreement is an agreement between the primary lenders who are providing the financing to the . It governs the common terms and relationships among the lenders in respect of the borrower’s obligations.
If there is a mezzanine funding component, the terms of subordination and other principles to apply as between the senior debt providers and the mezzanine debt providers. Intercreditor Agreements will specify provisions including the following:
- Common terms
- Order of drawdown
- Cashflow waterfall
- Limitation on ability of creditors to vary rights
- Voting rights
- Notification of defaults
- Order of applying the proceeds of debt recovery
Common Terms Agreement
A Common Terms Agreement is a project finance document between the project lenders and thewhich calls out terms that are common to all the financing instruments and the relationship between them with definitions, conditions, order of drawdowns, and voting powers for waivers and amendments. Common Terms Agreements clarify and simplify the multi-sourcing of finance for a project and ensures that the parties have a common understanding of key definitions and critical events.
Operation & Maintenance Agreement
Project finance documents which govern project operations are Operation & Maintenance Agreements, or O&M Agreements. O&M Agreements are contracts between the, which owns the project and the company engaged to operate the project. The delegates the operation, maintenance and often performance management of the project to a professional operator that has expertise both in the industry and in the subject locale.
The operator could be one of the sponsors of the project, one of the shareholders of theor it can be a third-party operator. In some cases, the itself can act as the operator. This makes the responsible for the operations and maintenance. A hybrid arrangement is also possible where the handles operations and maintenance with technical assistance from an experienced professional under a technical assistance agreement. Basic provisions of an O&M Agreement are:
- Definition of the service
- Operator’s responsibility
- Provision regarding the services rendered
- Liquidated damages
- Fee provisions
The Shareholder’s Agreement or SHA, is an agreement between the project sponsors to form a project finance transaction. The Shareholder’s Agreement deals with:, or , for the project development, ownership and operation. This is the most basic of structures held by the sponsors in a
- Injection of share capital
- Voting requirements
- Dividend policy
- Management of the
- Disposal and pre-emption rights
Tripartite Deeds are project finance documents that are typically required by project lenders to establish a direct relationship with themselves and counterparties to the contract. Tripartite Deeds are sometimes referred to as consent deeds, direct agreements or side agreements.
The Tripartite Deed specifies the circumstances under which the project lender may step in to remedy a default under the project documents. Although Tripartite Deeds often gives rise to difficult negotiating issues, the document is critical to a properly documented project financing. Tripartite Deeds typically contain the following provisions:
- Confirmation by the contractor or relevant party that it consents to the lender taking security over the relevant project contracts.
- An obligation of the relevant project counterparty to notify the lenders directly of defaults by the under the relevant contract.
- To ensure that the lenders will have sufficient notice to enable it to remedy any breach by the borrower.
- An acknowledgment by the relevant party regarding the appointment of a receiver by the lenders and that the receiver may continue the borrower’s performance under the contract.
- Terms and conditions under which the lenders may transfer the borrower’s entitlements under the relevant contract.
A Supply Agreement is a project document between theand a contractor who supplies materials to the project such as feedstock or fuel.
If ahas an Off-Take Agreement, the Supply Contract is usually structured to mirror the Off-Take Agreement for items such as length of contract and force majeure provisions. The volume of input supplies required by the is usually linked to output.
For example, under a Power Purchase Agreement, the purchaser who does not require power can ask the project to shut down the power plant provided the purchaser continues to pay the capacity payment. If this occurs, themust ensure its obligations to buy fuel can be reduced in parallel. The degree of commitment by the supplier can vary.
Primary Supply Agreements can be fixed supply where the supplier agrees to provide a fixed quantity of supplies to theon an agreed schedule or a variable supply between an agreed maximum and minimum. The supply may be governed by a take-or-pay or take-and-pay contract.
Supply Agreements may provide for an interruptible supply where some supplies are offered at a lower-cost but are interruptible. They may also be structured as a tolling contract where the supplier has no commitment to supply at all, and may choose not to do so if the supplies can be used more profitably elsewhere.
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